FAQ: Japan Crude Cocktail

Japan Crude Cocktail (JCC), also known Japan Custom Cleared, represents the average price of crude oil imported to Japan and reported by the Japanese Custom (Ministry of Finance). JCC is used by LNG traders in APAC despite representing crude oil prices.

At the inception of the LNG industry, there was no natural gas benchmark or crude oil futures, which left room for JCC to become the index. Traditional LNG projects needed committed buyers under long term contracts, before proceeding to a final investment decision and JCC was adopted as pricing mechanism.

Today, JCC is a most common way to price LNG contracts in Japan and other first-generation buyers in Korea and Taiwan. By extension, most of the historical term contracts out of Malaysia, Australia and Indonesia were based on JCC.

JCC is as well a key component in Japan “fuel cost adjustment system”, a price mechanism designed to adjust monthly electricity fees.¹

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Two cash-settled futures contracts are listed on NYMEX for JCC.

The first contract is for JCC Detailed in USD/barrel, the second one is for JCC Detailed in JPY/Kiloliter The floating prices are based directly on the data published by the Japan Custom and Ministry of Finance (primary source), following the definition commonly used in physical contracts.

JCC contracts are sized at 1,000 barrels and 100 kiloliters respectively with a minimum block size of five (5) contracts for USD-denominated futures and ten (10) contracts for the JPY-denominated ones.

The cash-settled contracts are listed for every month of the current year and the next four calendar years.

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JCC futures on NYMEX allow you to:

• Avoid foreign currency exposure by trading either the JPY or USD-denominated contracts, depending on your exposure in the physical market
• Enhance price transparency and market discovery by trading on CME ClearPort or CME Globex
• Transition part of your OTC-bilateral trading activity to cleared futures
• Trade in tandem with major Natural Gas and LNG references like Henry Hub, NBP, TTF and JKM (Platts)
• Lock price differentials with Japanese Power futures (Tokyo and Kansai areas)
• Benefit from significant margin offsets between JCC and Crude Oil benchmarks listed on NYMEX (WTI, Brent, Platts Dubai)

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Most of the JCC derivative transactions are currently traded bilaterally in the OTC market. Market makers typically hedge JCC positions by trading a basket of Crude Oil futures, based on proprietary proxy models.

Producers and utilities have efficient hedging instruments through OTC swaps/options but take credit-risks on Market-makers as the deals are kept on a bilateral basis. Market-makers keep a price risk in their book, equivalent to the difference between their model and the official JCC price, until the instrument settles (settlement risk).

JCC futures listed on NYMEX allow counterparties to clear their OTC transactions through block-trades to mitigate their credit risk.

Market-makers can similarly reduce their settlement risk by offsetting some of their position without taking a bilateral credit-risk.

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The calculation for JCC is derived from data published by Japan Ministry of Finance and Custom.

Specifically, JCC is the average price of a basket of customs-cleared crude oils under the following nine HS Codes: 2709.00 100, 2709.00 900, 2710.19 162, 2710.19 164, 2710.19 166, 2710.19 169, 2710.19 172, 2710.19 174, 2710.19.179, reported in the Japan customs statistics in terms of value and quantity.

The JCC price in JPY/kiloliter is the ratio of the total value to the total volume of the nine applicable HS codes.

A first set of provisional data is published around the end of each month for the preceding month, followed by a set of revised data, also called detailed data, one month later.

Lastly, a set of final data, referred to as fixed data, is released in mid-February for the months of the preceding calendar year. This means there is no detailed data for the month of December.

In addition, JCC in USD/barrel for both provisional and detailed data are also used in LNG contracts. By convention, the conversion rate used for JPY to USD is based on data from Japan Ministry of Finance and Custom.

NYMEX JCC futures are based on the “Detailed” set of data. For December contracts the “Provisional” version is used.

NYMEX JCC futures replicate the definition of JCC and non-standard conversion rate commonly used in LNG physical contracts.

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JCC futures have a non-standard feature for Final Settlement Date and Last Trading Day (LTD).

The floating price of NYMEX JCC futures denominated in USD/barrel (JCC) and JPY/kilo-liter (JCY) are based on “Detailed” data published by Japan Ministry of Finance around two months following the observed period.

Each contract month listed on NYMEX corresponds to a calendar month, and the data to calculate the floating price are only available two months after this calendar month.

For this reason, NYMEX JCC futures expire around two months following the contract month, which is a special feature. Usually, futures contracts expire before or at the end of the contract month.

Similarly, NYMEX JCC futures can be traded after the end of the contract months, which is as well a special feature.

NYMEX sets the LTD around two months after the end of the listed month.

The exact rule for LTD is:

• Trading in Jan - Nov contract months terminates at 9:30 a.m. Japan time on the 2nd last Japan business day of the 2nd month after the contract month.
• Trading in the Dec contract month terminates at 9:30 a.m. Japan time on the 2nd last Japan business day of the month after the contract month.

LTDs and Final Settlement Dates are available in the “calendar” table of each dedicated contract webpage.

Trades may occur after the end of the pricing month, up to the publication of the official data and LTD.

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Yes and no. JCC futures are the first exchange-traded contracts, but banks and international trading houses have been trading OTC swaps and options for JCC for more than 10 years.

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LNG is often priced on oil, multiplied by a coefficient to reflect the oil/gas parity.

The oil parity is the LNG price that would be equal to that of crude oil on a barrel equivalent basis. A coefficient of 0.1724 results in full oil parity. Most current contracts are in a range of 11-15% to oil prices.

To avoid sharp increases or drops of price resulting from this oil indexation, many Asian LNG contract prices are based off the average of JCC for the preceding three to nine months, sometimes with a one-month lag.

Mechanisms like Cap/Floor Prices and S-curves are common. A S-curve means the coefficient used in the formula will change to a lower percentage if oil prices are above/below a certain level.

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Alternatives to oil indexations include fixed prices or to link the price of LNG to a Natural Gas or LNG price index.

In Europe and the U.S., infrastructure and regulations have led to the emergence of active trading hubs, each reflecting their local market’s dynamic.

NYMEX Henry Hub, quoted in USD/MMbtu, is the benchmark for U.S. natural gas and by far the most active Natural Gas futures contract in the world. U.S. LNG term contracts are commonly indexed on NYMEX Henry Hub.

NBP and TTF are the leading European gas hubs and are increasingly used for LNG pricing in Europe.

In the absence of efficient gas trading hubs in Asia, the LNG community has started recently to adopt Platts JKM for spot transactions.

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1. https://www.tepco.co.jp/en/ep/rates/adjustment-e.html